Can Circular Reasoning Make You Rich?

Tweet This

We Americans are notoriously bad at saving money. While people in Germany, Sweden and even France save about 10% of the money they make, folks in the U.S. save closer to 3 or 4% of their earnings. With so little money saved, Americans face difficulty absorbing economic shocks like recessions and layoffs, and also find themselves with too little money in the bank when they retire.

What will it take to get Americans to save more money? According to a study in Psychological Science, it will require a shift in our thinking. But to which way of thinking?

We could think about savings as a kind of circle of life:

The future will be exactly like the present: if you save money now, you will save in the next pay period. If you don’t save money during the present pay cycle, it is likely you won’t save money in the next cycle.

Or we could think about savings as a kind of highway of opportunity:

The future will be a road that stretches forward and onward from the present. If you save money now, you will be in a much better position in the future, and this better future state forms the basic idea of progress.

Which of these ways of thinking do you think will lead people to save more money? Well that might depend on whether you focus on today’s savings or tomorrow’s. Because when two groups of people were exposed, at random, to one of these two ways of thinking—circular or linear—the folks in a linear mindset did not imagine saving much money today, but expected to more than make up for that with future savings:

If people follow through on these expectations, the linear thinkers should substantially out-save their peers by the second or third month. Only one thing stands in the way—following through on their intentions. And as it turns out, linear reasoning—the highway of the future offering us so many opportunities to make up for today’s failures—promotes procrastination.

When the researchers tested how much money the people actually saved, rather than what they expected to save, they discovered that those exposed to circular thinking saved substantially more than those exposed to linear reasoning, and also more than those in the control group who were not exposed to either kind of thinking.

The study was small. The results are preliminary. But the finding is provocative. If we rely too much on linear reasoning—on thinking of the future stretched out in front of us, with thousands of opportunities to change directions and reform our ways—we may instead find ourselves passing one milepost after another without pulling over to park any of our earnings into an interest-bearing savings account.

If you don’t change today, you have lost an opportunity to influence the way you behave tomorrow.